The Fed’s Triple Mandate Poses A Big Risk To Consensus

Every man and his dog involved in markets will know of the Fed’s ‘dual mandate’. Not many, including myself until this morning, would know that there’s actually a third part to it.

The Federal Reserve Act stipulates that the Fed’s goals are to ensure maximum employment, and stable prices. But, the Act also stipulates a third goal, to promote “moderate long-term interest rates”.

Now, one can argue about the definitions of ‘moderate’ until the cows come home. In the context of the last 5 years, a 5% benchmark 30-year yield is clearly relatively high, in the context of the last 30 years, it is indeed ‘moderate’.

The reason that all this legalese could well prove important is twofold:

1. The Trump Admin are seeking greater control over the FOMC’s policy actions
2. The Trump Admin are seeking to ensure borrowing costs are as low as possible

Timing is also key here, with the FOMC on the verge of resuming the easing cycle via a 25bp cut at the September meeting, and after CEA Chair Miran was confirmed to his new post as Governor, replacing Adriana Kugler, just a day before that meeting begins.

Perhaps of even more intrigue than that is that Miran actually quoted the full, three part mandate in prepared testimony to the Senate Banking Committee as part of his confirmation process. Testimony which, for the most part, nobody seemed to ay especially much attention to – least of all, as they’re usually rather boring to read.

In any case, it’s not hard to see where this could go in the future.

While the FOMC are on the verge of resuming their easing cycle, cutting not only in September, but probably once more this year, and at least twice in 2026, there is every chance that cuts to the fed funds rate don’t result in a decline in long-end yields. In fact, if said cuts cause inflation expectations to un-anchor, especially at a time of runaway federal spending, and spiralling budget deficits, then those cuts would likely result in a dramatic steepening of the curve, and much higher long-end yields.

Consequently, there potentially exists a world, next year, where rate cuts have cushioned the labour market against near-term downside risks, and where tariff-induced price pressures have started to subside, but long-end yields haven’t fallen especially far. While not my base case, given Miran’s comments, and the Federal Reserve Act itself, there is a decent chance that Treasury Sec. Bessent, or even President Trump, argue that the Fed aren’t in fact fulfilling every part of the job that they’ve been asked to do.

If this scenario were to come to pass, the Fed’s ‘solution’ would probably be three-fold, if the new Trump-appointed Chair is ordered by the Admin to engineer lower long rates. Firstly, end balance sheet run-off; secondly, restart quantitative easing, with a bias towards longer duration securities; thirdly, going ‘full BoJ’ and embarking on yield curve control (YCC) with explicit target levels for Treasuries, above which they shan’t be permitted to trade.

To reiterate, none of this is my base case, and I remain uninclined to buy duration, and very inclined to remain in Treasury steepeners, for now. It is, however, probably the biggest risk to that base case, and to what has now become a very crowded consensus view.

Look out for a Trump Truth Social post next year along the lines of – “There’s NO INFLATION, the best JOBS market ever, but long rates are TOO HIGH! The Fed are FAILING, and breaking the LAW”.